WASHINGTON–With President Trump saying he plans to make a decision soon on selling Fannie Mae and Freddie Mac and getting the companies out from federal government conservatorship—under which the two companies have operated since 2008—but there are numerous questions to be answered and implications for the market before that happens, a new report states.
“For home buyers and owners, the stakes are high. Some 40% of mortgages they signed up for last year were sold to Fannie and Freddie,” noted the Wall Street Journal.
According to the Journal, selling shares to investors will require managing the risk of sending mortgage rates higher at a time when mortgages are already unaffordable for many.
The Considerations
Among the considerations before the two government-sponsored enterprises (GSEs) can be sold, the Journal reported, are the following questions:
What Should Be the Relationship Between Government and the Companies?
“Before the 2008-09 financial crisis, Fannie and Freddie benefited from the market’s presumption that the government would come to their rescue if they got into trouble, which is what ultimately happened in 2008,” the Journal stated.
Laurie Goodman, institute fellow at the Urban Institute, told the Journal an implicit guarantee is the most straightforward way to try to proceed with a share offering, since the two companies already effectively operate with one.
The companies have lines of credit with the Treasury Department totaling $254 billion, and the market assumes the government would step in if those lines were exhausted in an emergency, the report added.
“Other ways of handling the guarantee might be thornier. Explicitly giving Fannie and Freddie full government backing would require difficult-to-pass legislation,” the analysis stated. “Reducing government support might lead to higher mortgage rates.”.
How Would the Risks be Managed?
The Wall Street Journal reminded that after Fannie and Freddie collapsed, critics blamed the implicit guarantee, saying it encouraged the companies to take risks by privatizing their profits while socializing their losses.
Mark Zandi, chief economist at Moody’s Analytics, told the Journal Trump’s approach appears to be “going back to the future.” If the implicit guarantee looks like it did before 2008, it would bring back memories of the financial crisis, he told the publication.
Who are Fannie and Freddie Trying to Serve?
“The companies have generally served a swath of the population across low and high incomes,” the Journal reported. “The paltry returns on some loans are subsidized by the meatier returns on others. The administration will have to decide how wide or narrow the intended customer base should be. If the companies are chasing maximum profits, they might seek a higher-end customer base and minimize their focus on first-time buyers.
Those buyers might instead turn to government programs like Federal Housing Administration-backed loans. That would potentially defeat the purpose of any efforts to take the companies out of government control, according to a paper Goodman published in April.
What Should the Companies Look Like?
Prospective buyers of Fannie and Freddie shares will want to know what they are getting, the Journal explained. “Are the companies effectively utilities with lower returns, or would they look like private firms with higher returns?,” the report asked.
“This is important for mortgage rates, which typically bake in the ‘guarantee fees’ that Fannie and Freddie charge to back their loans. To achieve higher profits, they would increase fees,” Jim Parrott, a former Obama administration housing adviser, told the Journal.
Mortgage rates would rise, especially for borrowers with lower credit scores, he said.
